Paying for College

Students, parents and grandparents find paying for a college education as ‘the’ most expensive investment they will ever face. Education costs have escalated at a higher rate than health care. Eventually, unless something isn’t done to reign in the madness, higher education will only be available to the children of the wealthy.

It is around this time of year I get a few calls from clients asking how they can pay for their child’s or grandchild’s college and then they mention that we need to get creative finding the money.

This is what I recommended for my grandson. If you start early enough I’ve always favored the Michigan Education Trust, MET, as the only real guaranteed way of paying for a college education. The MET is sponsored by the state of Michigan and information can be found on the state’s web site. Basically you pay for the college education at a discount, almost like buying a zero coupon bond that matures in the future. If the college costs are $40,000 it may cost someone when the child’s in knee pants $10,000 paid into the plan over a few years. It’s a neat, no fuss way to get a paid in full college education. The problem is folks don’t start thinking of funding a college plan until their child is a few years away from the Ivy Halls. I think a great many parents, who start college savings late, are of the mind that their kid is either going to prison or college and they just want to make sure which way he or she is heading before they commit any dollars. Trust me, the MET is the best you’re going to get if you start early. It gets pricier as the kid gets closer to college; but it never gets where you need 100 cents on the dollar.

On the other side of the street stock brokers, mutual fund salespeople and insurance agents favor the 529 Plan where an account is established for the kid and investments are managed by the parent or broker through mutual funds. The problem with the 529 Plan is that, as everyone found out too late a year ago, markets collapse without warning and so goes the college fund. The reality is that college costs increase at a 10% annualized rate and historically no one I know has been able to consistently match that cost increase each and every year with matching investment results. Broker and their ilk still love the 529 ‘cause it pays them a commission when they sell it to someone and they have kids of their own, you know.

Other places for college money, outside of grants and loans, are to borrow on the equity of the home but few families today have sufficient equity to borrow against. If you have a retirement plan at work you may borrow against a 401k, the maximum loan is $50k or 50% of the account value and interest is paid back to the owner’s own account over a five year period of time.

Cashing in a portion or all of an IRA also works and if the owner is under  59 1/2 and uses the funds for college education there is no penalty but there are income taxes to be paid. There is an IRS form you need to complete and attach as part of your income tax to show what the money was used for so you do not pay the penalty.

Still there are other ways of paying for college if you start early enough. The most prudent has always been the joint account investment plan that allows the parents to save money and use the assets if they child or children decide to go to college. If the kids decide not to go to college the money is available for retirement, a child’s wedding or a future college plan for a grandchild.

There are tax credits and benefits available but you have to call your accountant to get that information. The one thing you can do if starting late is make a plan, commit a fixed amount of dollars and at the worst demand the child pay for some of the cost along the way.

If you have questions call Paul at 877 783 7080 or write to him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about money.